The Chibuku play into Africa

Tafara Mtutu

In 2020, Delta Corporation completed the acquisition of United National Breweries (UNB) from Diageo Plc, a deal that had been in the pipeline since 2018. According to various reports, Diageo acquired UNB after purchasing the remaining 50% of the business for US$36 million in 2013 and alluded to a c.US$41 million aggregate exceptional loss upon the sale of the business in 2020.

UNB started on a depressed note under Delta’s control as it was impacted by South Africa’s ban on alcohol sales which was part of the Covid-19 lockdown restrictions that came into effect in March 2020. UNB manufactures sorghum-based alcoholic and non-alcoholic beverages. The company’s major sorghum beer brands include Chibuku, Ijuba, Leopard and Tlokwe. The brewer also manufactures non-alcoholic sorghum-based beverages under the Mageu and City Jive brands.

The acquisition of UNB extends Delta’s footprint into South Africa. The southern African economy is among the largest consumers of alcohol on the continent. According to Statista, the country is ranked third in Africa after Nigeria and Eswatini, with an alcohol consumption per capita of 9,3 litres.

The global alcohol consumption per capita, in comparison, was 6,2 litres in 2018. In a report on South Africa by the World Health Organisation, beer accounted for the largest share in alcohol consumption (56%), followed by wines and spirits with 18% apiece. Other types of alcohol (fortified wines, rice wine, palm wine and other fermented beverages made of banana, sorghum, millet or maize) constituted the remaining 8%.

The sorghum beer market in South Africa comprises three main players, namely UNB, Awethu Breweries and Tiger Brands’ King Food Corporation. UNB is estimated to have a market share of around 90%, with the remaining competitors accounting for the remaining 10%. The sorghum beer market, however, has been struggling to grow as consumer preferences shift from opaque to clear beer brands. This is made evident by the increasing per capita consumption of clear beer and a corresponding decline in the per capita consumption of traditional beer in South Africa between 1961 and 2016.

Further, prices of traditional beer have remained constant at R0,0782/litre since 2013 while other alcoholic beverages have registered significant price growth over the same period. According to South African Wine Industry Statistics (SAWIS), prices of wines grew by an average of 78% and spirits by an average of 87% between 2013 and 2021.

Based on these trends in South Africa’s alcoholic beverages markets, the opaque beer market is slowly shrinking, and we opine that there is limited growth potential for UNB as an operation that is focused on local demand.

However, the acquisition holds significantly more upside as an additional base of operations for the Chibuku brand in the sub-Saharan Africa region and beyond.

The key benefit of the acquisition is Delta’s production capability in a relatively stable country from a macroeconomic standpoint. Currently, Delta operates in Zimbabwe and Zambia, which have been facing significant economic challenges. While Zimbabwe’s macroeconomic environment has somewhat stabilised, the economy’s volatile policies since 2018 have dealt major blows to Delta.

Zambia is currently weighed by external debt which has driven the depreciation of its currency for two years running. The UNB acquisition therefore serves Delta as an additional base of operations that the business can rely on.

South Africa’s alcoholic beverages market has proved to be integral to the economy after the uproar that followed President Cyril Ramaphosa’s ban on alcohol sales in 2020.

The alcohol industry also issued a report detailing the R52 billion losses that the economy incurred as a result of the alcohol bans last year. In addition, South Africa boasts one of the best environments for doing business in Africa.

The economy is ranked 84th on the World Bank’s Ease of Doing Business Index and is behind Kenya (13th), Rwanda (38th), and Mauritius (56th) on the African continent. In comparison, Zambia is ranked 85th and Zimbabwe is ranked 140th out of 190 countries.

This augurs well with Delta’s Chibuku Super, a carbonated version of the sorghum brew with a longer shelf life than the original beer’s shelf life of four to six days. With a longer shelf life, Delta can comfortably produce in South Africa and export to target markets like Botswana and Malawi.

Given that Chibuku Super has been a success in Zimbabwe, we opine that the business is likely to register a similar outcome in other regional markets.

We also like the fact that Chibuku has a strong brand equity in the SSA region. The brand is established in Zimbabwe, Zambia, Botswana and Malawi. We also note that there is potential for the brand to break into other African economies that manufacture variants of sorghum beer.

According to Beerandbrewing.com, Kenya has chang’aa, Botswana khadi, Central Africa Republic hydromel, and Ethiopia araque, katila, and tella. Uganda has tonto, mwenge, murumba, marwa, kweete, and musooli, and Ghana, Nigeria and Togo have pito, burukutu, and akpeteshie.

We also reiterate Delta’s main reason for the purchase — to raise foreign currency that will support its Zimbabwe operations. The foreign currency receipts from UNB will be used to foot the brewer’s import bill in Zimbabwe and service its foreign-denominated obligations. Delta’s shares remain lucrative on the Zimbabwe Stock Exchange. The counter trades on a price-to-earnings ratio of 17.4x, which is undemanding in comparison to a regional peer average of 26.1x (comprising of East African Breweries, Nigerian Breweries, Guinness Nigeria, Tanzania Breweries and Zambian Breweries).

Mtutu is a research analyst at Morgan & Co. He can be reached on +263 774 795 854 or tafara@morganzim.com